What is the history of diesel fuel price increase?
In the past, several years ago, diesel fuel was less expensive then gasoline was.
What happened, why diesel is more expensive, in Europe diesel was always less expensive then gasoline, till now?
simple… corporate profit! and road tax increases. but you knew that already.
Because it’s less elastic in demand than gasoline.
Skipper
There are a number of factors. Right now (maybe different in 6 months) in the US the refineries, which are old, are optimized to produce more gasoline and less diesel than is needed right now. The different kinds of available crude also plays a part (not all crude is the same). I understand that a few new refineries are at least in the planning stage and they are going to be designed to produce a larger percentage of diesel.
Europe has a different tax structure than the US (diesel has always been considered a “commercial” fuel. It also have refineries that are slanted more towards diesel. There are quite a few factors.
Part of the reason is demand. Diesel fuel is used by trucks, trains, and, to a lesser degree, private citizens. Yes, there are a lot of owner/operator truck drivers who have parked their trucks, but there are still company drivers on the road, using diesel fuel not only to ship goods, but also for comfort as they live in their trucks. Company trucks drivers only care about the price of fuel when it gets high enough to slow the trucking industry. Otherwise, diesel fuel could be $10 a gallon and they would still keep using it. Company drivers get paid by the mile and the company bears the cost of fuel.
When automobiles first became popular, diesel fuel was a cheap biproduct of gasoline production. Now that the industry is shifting to low sulfur diesel fuel, it is similar to when cars switched to unleaded gasoline, except newer trucks can only run on untra low sulfur diesel, which is even more expensive.
Gasoline and diesel fuel have demand that is relatively inelastic (like precription medicine, for example). That means that an upward shift in price will lead to little or no change in the amount demanded. However, at $4 a gallon, gasoline is getting to a price level that is more elastic, so people who use gasoline are now using less because of the price. On a supply/demand chart, an item with inelastic demand will have a demand curve with a high slope (almost vertical). An item with elastic demand will have a demand curve with a low slope (almost horizontal). So a small change in price will have a big effect on quantity demanded if demand is elastic. My theory is that the demand curve for gasoline starts to level out at or slightly above $4/gallon. The demand curve for diesel probably levels off at a higher price, like $5 or $6 per gallon.
Price elasticity also works in the opposite direction. If the price goes down on an inelastic good, the amount demanded will either make a small shift or won’t shift at all. For example, if fuel dropped from $4/gallon to $3.90/gallon, you would probably not say to yourself, “At last, I can finally take that 2,000 mile trip.”
Diesel fuel always outperformed gasoline in terms of energy produced per gallon. Low refining standards kept it cheap in spite of this feature. However, diesel fuel now requires more processing. This combined with diesel’s energy potential combine to create upward pressure on the price. This is in addition to normal supply/demand pressures that push the price up.
I have worked in an oil refinery for many years and hope to answer some of your questions. Over the past 20 or so years, many oil reineries went out of business in our country (approx 200) due to low profit margins and governmental / EPA controls. Unfortunately now that the margins are up, we no longer have adequate refineing capacity to keep up with the demand. It now takes upwards of 6 years to get the permitting complete from the EPA and government to begin building new oil refineries. Many refineries did shutdown because they could not comply (costs) with new environmental regulations which keep coming out. They have since been torn down. Even to enlarge existing refineries, the permitting requires years of red tape. Over the past few years EPA has required the production of ULSD, Ultra Low Sulfur Diesel. This required many changes, permits, and work to convert the refineing process to make this product. Special conversion reactors and expensive titanium catalyst’s were required. This catalyst must also be changed out much more frequently requireing the units to be shutdown for longer periods of time during the change outs. Most refiner’s can switch to making a bit more diesel than gasoline if needed but can only process crude oil to their unit’s limits. I believe also that the price of gasoline could be reduced if the EPA regulations could be eased somewhat. Currently regulations require several “or more” blends to be made for different states and different regions. Would definitely save refineing costs to be able to make just a few specific gasoline blends. We all want clean air and water and I think that can be attained with common sense and appropriate governmental / EPA regulations. I’m sure that all of us are concerned about being so dependant of foreign crude. There is a lot of crude available within the US, some indications of more than the middle east inventories. We just need to be able to go after it asap and be environmentally complient.
I’m intreigued by your demand elasticity model. The theory is excellent “classic” economics, well proven, and excellently articulated by you. However ther are two points I’d question.
First, the demand curve for gasoline will begin to drop, and I believe it has. All other factors staying stable, it should then level out, however the development of new technologies now made economically fiesable will likely cause it to drop more, albeit at a slower rate.
Second, I’m not sure diesel fuel is as inelastic as assumed. A portion of the trucking industry has parked their vehicles due to the price, and that should theoretically cause more efficient use of the existing trucking resources. Trucking firms will find more efficient ways to transport, possibly even partnering to a greater extent. UPS and FedEx are using computer modeling to make their fleets more efficient, and I suspect a service industry may even form to enable trucking firms to partner in computer models and make their fleets more efficient. Large organizations that ship large amounts of goods such as WalMart and Home Depot may even begin this modeling if they haven’t already. Perhaps this will turn out to be the boost the railroad industry needs.
In short, I’m not sure the diesel market demand will turn out to be as inelastic as it’s perceived to be. The demand curve may just surprize the economists and drop. The paradox is that a 33% higher price with a 15% drop in demand may just mean greater revenue with lower production and distribution costs. I think that’s the game the producers are playing right now. Keep supply low and profits go up!
Last paragraph is great. Ultra Low Sulpher Diesel sounds great but costs money. And ULSD fueled engines still put out far more NOx emissions that gas engines.
Ultra Low Sulpher Diesel sounds great but costs money. And ULSD fueled engines still put out far more NOx emissions that gas engines.
Well ULSD does cost a little more, but only a few pennies per gal. Yes Diesels do create more NOx (but I don’t know what that has to do with the price) and they make less CO. Both fuels have their pollution problems. They are not the same set of problems however. Comparing them on that bases requires a lot of assumptions and tradeoffs.
That looks like a very good description of the situation.
We just need to be able to go after it asap and be environmentally complient.
I would add that we also need to work hard at reducing consumption.
When ever gas prices rise (like they are now)…diesel rises along with them, but at a higher rate. When gas prices are stable…diesel prices drop to BELOW regular. It has every time in the past 20 years. Just 2 years ago when gas prices were stable Diesel was selling about 20 cents BELOW REGULAR.
Meant to say expensive costs of “platinum catalysts” which requires more change out with ULSD production. Titanium is used in some equipment to reduce corrossion efects.
believe also that the price of gasoline could be reduced if the EPA regulations could be eased somewhat.
The gas companies don’t want more refineries. The more refineries the less profit.
We all want clean air and water and I think that can be attained with common sense and appropriate governmental / EPA regulations.
The gas companies do everything in their power to get around every single regulation. What’s appropriate is anything less then clean air and clean water is NOT appropriate. And I fully believe the gas companies can comply. There are refineries right now that don’t meet the latest EPA guidelines. Why because it would hurt the companies profits…nothing more…and at a time when they are doing RECORD profits.
There is a lot of crude available within the US, some indications of more than the middle east inventories. We just need to be able to go after it asap and be environmentally complient.
How about instead of spending BILLIONS every year on a war we shouldn’t be in…we take that money and invest in new technologies to rid of oil dependency. I may not see it in my life time…but MAYBE, just maybe we can do it before the oil runs out.
But gasoline and diesel are often transported by ship to the end market. Just because usage has leveled or dropped in the US does not mean it has done the sam in Asia. I believe that their markets are still growing.
Diesel costs more because the DEMAND for #2 distillate (also called Diesel fuel, home heating oil, Jet A) has grown much more rapidly than gasoline. The demand for this grade of fuel in Europe and Asia has also grown rapidly and our own military has an enormous thirst for it also…
We now import 65% of our oil, much in the form of finished products. No one is going to invest a billion dollars in a new refinery when they have nothing to refine…You can drill all you want, everywhere you want, but the BEST you could do would be to hold that number at 65% for a few years. You will NEVER be able to reverse it without MASSIVE conservation efforts resulting in a huge reduction in daily demand…
#2 distillate (also called Diesel fuel, home heating oil, Jet A)
Jet fuel is more or less kerosene, which I think is a bit lighter than fuel oil (closer to gasoline). Home heating oil and Diesel are practically the same thing, except the latter is taxed more.
theoretically cause more efficient use of the existing trucking resources. Trucking firms will find more efficient ways to transport, possibly even partnering to a greater extent.
The most insane thing you can do is to load up an eighteen wheeler and drive it clear across the country. Long distance shipping should be done only by trains, which are much more efficient. Of course, you need a truck at either end of the journey, but you can use intermodal freight containers or even strap a trailer onto a flatcar. It might require upgrades to railroad equipment and track to handle all the freight moving over, and we need to keep an eye on the railroads to prevent price gouging if there’s no long-distance truck competition.
This whole family of distillates, from kerosene to bunker oil is in short supply and it’s price has been bid up accordingly…People were expecting a new wave of Diesel powered passenger cars to be sold in the U.S. Well that’s not going to happen…
I warned people on this site three years ago about waiting on purchasing a diesel equipped vehicle until we see what happens to diesel fuel prices. And that’s because all diesel fuel is ULSD fuel. And that’s because all the new over-the-road semis have Diesel Oxydizing Catalyst’s. And if you run anything other than ULSD fuel through these engines, you’ll kill the DOC.
It’s the extra expense of removing the sulpher from diesel fuel that’s driving the cost up.
Tester
The most insane thing you can do is to load up an eighteen wheeler and drive it clear across the country.
How would you ship perishable refrigerated goods, air freight? That would be insane. The best way to ship things like produce is to put two team drivers behind the wheel of a truck pulling a refrigerated trailer. If your goods are perishable, trains won’t do.
Diesel prices usually come down to below regular when gas prices stabilize. But the new ULSD fuel it’s going to be tough to predict. I agree with waiting until gas prices stabilize and see where diesel ends up.